Good Growth, Bad Growth

April 30, 2011

There are various perspectives on economic growth, but the typical view is that it is always good and is necessary for prosperity. Many economists think that it is so good that central governing authorities must promote and actively stimulate it. Thus, growth has become an important and powerful political agenda.

Economic growth, as it is presently measured, is a poor gage of what is actually good for the inhabitants of society. This is especially so for a large country covering millions of square miles and including hundreds of millions of residents. According to the politicians and the mainstream economists who promote it, as long as national accounts show an increase after adjusting for inflation, all is good. They assume that the growth and the inflation are both spread evenly throughout the economy and that, as long as the total number increases, everyone in society benefits. There is, however, a great deal missing from the figures, and there are different definitions of prosperity which the numbers cannot take into account.

When economies are viewed only from a macro, country-wide level, it misses the most fundamental ingredients of any economy, the individuals and family units. Every person wants to improve his or her life and will take actions intended to bring that about. Those actions will include production of something of value, consumption of goods, saving, and investment whenever the individuals view each of those as contributing to overall well-being, based on their own preferences and assumptions about the future. When there is a stable monetary system, protection of private property, rule of law, and absence of government confiscation, the incentives are in place for individuals to act in ways which will let them maximize their own prosperity, however they view that, whether that means an increase of physical things, of productive capacity, of family time, of health, of provision for the future, or other un-measureable possibilities. Individuals know what they value most, and the prosperity of society is merely the prosperity of individuals.

Nearly all countries have had a monetary system based on inflationary credit and fractional reserve banking imposed upon them. The instability of that system is manifested in the routine cycle of booms and busts. That instability is an inherent characteristic of the flexible money supply. The leverage of fractional reserve banks rapidly expands the new money injected by the central banks in the boom times. The other side of the double-edged sword is that leverage just as rapidly causes a severe contraction on the bust side. Most people see the bust as the problem, because that's when the malfunctions become apparent and the pain is felt by the most people. The bust, however, is merely the inevitable and necessary correction of the real problem, the boom and all of its economic distortion.

Macroeconomic policy, both monetary and fiscal, is engineered by central-planners who presume to know what is good for everyone, and is geared toward stimulating growth. That stimulation necessarily involves the creation of new money, which is the debasement of the currency already in circulation. Inflation, however, does not hurt everyone equally. Those who get the money first, the central banks, fractional reserve banks, the government, and government bond dealers all get to use the new money before the devaluation. Once it flows into the system, it forces prices higher, and those who get it later are not able to buy as much with it or with any of the money they previously held. It is like diluting lemonade with water. Beyond that, the growth of one geographic area or sector of the economy often comes at the expense of others, with resources being involuntarily transferred between them.

Real, sustainable growth can only come from savings, not from creating money and credit out of nothing. Loans from a society's prior savings would provide capital for business growth while market-based interest rates and prices would provide the appropriate signals to savers, investors and consumers as to where society's resources would best be used. The interest rate manipulations, confiscatory taxes, and bureaucratic burden distort all economic decisions by the most important units of society, the individual people. Moreover, it causes the destruction and misdirection of real resources and perpetrates a mass redistribution of wealth from the productive people in society to the political class.

Growth for its own sake is not good under any circumstances. It is good only when individuals create their own growth by being productive and trading with others who have also produced value.